Emerging-Market Crisis Talk Vanishes as Currencies Rally

Customers count rupiah banknotes at a currency exchange office in Jakarta. The rupiah has advanced 7.7 percent in 2014, paring last year’s 21 percent loss, and reached a five-month high of 11,254 per dollar on March 17. Photographer: Dimas Ardian/Bloomberg

April 7 (Bloomberg) -- The emerging-market currencies rout
that had sparked comparisons to the 1997 Asian financial crisis
is becoming little more than a fading memory.

The Bloomberg index of 20 developing-nation currencies has
erased this year’s losses, rebounding from a five-year low
reached in February, as Indonesia’s rupiah, Turkey’s lira and
Brazil’s real surged. Capital is starting to flow back into
emerging markets, with exchange-traded funds attracting $1.4
billion in the first three days of April, as countries take
steps to stabilize their economies, according to data compiled
by Bloomberg.

“The worst is over,” Kieran Curtis, an emerging-market
debt manager at Standard Life Investments in London, which
oversees $271 billion, said by phone on April 2. “The emerging-market story is less bad. We’re more comfortable holding
emerging-market currencies.”

Just a couple of months ago, the selloff prompted banks
from Morgan Stanley to UBS AG to draw parallels with the 1990s
crisis, when the Thai baht lost half its value in six months and
South Koreans lined up in the streets to donate gold jewelry to
the government. Policy makers have worked to quell investor
concerns since January, with South Africa and Brazil raising
interest rates and India and Indonesia cutting their trade
deficits.

‘Doom, Bloom’

Bloomberg’s currencies index tumbled 3 percent in January,
its worst start to a year since 2009, as South Africa’s rand and
the lira plunged. By April 1, it had erased this year’s losses,
climbing to 92.1 from a low of 88.9 on Feb. 3. The rally has
been broad-based, with 21 of 24 emerging-market currencies
tracked by Bloomberg gaining since January. China’s yuan,
Russia’s ruble and the Chilean peso were the losers.

“I am turning increasingly bullish on EM assets,” Benoit
Anne, the head of emerging-market strategy at Societe Generale
SA in London, said April 2 by e-mail. He recommends buying the
lira, rupiah, India’s rupee and Hungary’s forint. Describing a
shift in sentiment from “doom to bloom,” he said “we’re
definitely getting closer to the bloom phase.”

The doom stage lasted throughout January.

Argentina carried out the biggest devaluation of the peso
since 2002 that month, prompting a plunge to a record 8.2435 per
dollar. Turkish Prime Minister Recep Tayyip Erdogan’s cabinet
became embroiled in a corruption scandal that helped send the
lira to an all-time low of 2.39 to the greenback.

Ukraine Crisis

In Ukraine, anti-government protests led to the government
imposing capital controls, two months before Russia’s incursion
into the Crimea region unnerved investors across emerging
markets. At the same time, the U.S. Federal Reserve started to
pare its unprecedented stimulus program, a move that would
support the dollar, while a slowdown in Chinese manufacturing
deepened.

Morgan Stanley, which correctly predicted the start of the
currency rout last year, said at the height of the selloff that
it risked a “sudden stop” of capital inflows similar to Asia a
decade and a half ago. UBS said at the time that Turkey’s
fundamentals weren’t “significantly better” than Thailand’s in
1997.

Morgan Stanley and UBS aren’t convinced the rout is over.

While improved sentiment is justified for now, an increase
in U.S. interest rates will squeeze developing nations by making
their assets less attractive, Manoj Pradhan, a London-based
economist at Morgan Stanley, wrote in a March 31 report.

Real Yields

Inflation-adjusted yields in many of the countries are
still too low to keep luring capital, Bhanu Baweja, the head of
emerging-market cross-asset strategy at UBS in London, said by
phone on April 2. While he recommends clients “take profit” on
a bet for the lira to fall, he said he’s maintaining calls for
the forint, rand and ruble to weaken.

Traders are reducing their short positions, or bets that an
asset will drop, on many emerging-market currencies.

Foreigners cut net short wagers on the Brazilian real to
$21.6 billion on April 2 from a record $28.1 billion on Jan. 23,
according to data from Sao Paulo-based BM&FBovespa, South
America’s largest exchange. Overseas investors in the Chilean
peso forwards market reduced their net short positions to $13.3
billion on April 1 from an all-time high of $15.8 billion on
March 6, central bank data show.

ETF Attraction

Among 1,989 ETFs tracked by Bloomberg, two emerging-market
funds have attracted the most money this month after the SPDR
S&P 500 ETF Trust, which follows the U.S. stock benchmark.

The $33 billion iShares MSCI Emerging Markets ETF, which
invests in stocks, has added $947 million this month, reducing
its withdrawals this year to $6.5 billion. The $4.2 billion
iShares JPMorgan Emerging Markets Bond ETF, which invests in
debt, has attracted $409 million in April and $629 million this
year, according to data compiled by Bloomberg.

The rebound was in part triggered by policy makers’ efforts
to stem dollar outflows.

Indonesia cut the deficit in its current account, the
broadest measure of trade, to the equivalent of 1.98 percent of
gross domestic product in the fourth quarter, from the previous
period’s 3.8 percent. India’s government predicts its shortfall
will be less than half last year’s $88 billion.

The rupiah has advanced 7.7 percent in 2014, paring last
year’s 21 percent loss, and reached a five-month high of 11,254
per dollar on March 17. India’s rupee has risen 2.8 percent this
year after sliding 11 percent in 2013.

Turkish policy makers lifted their benchmark interest rate
to 10 percent from 4.5 percent at a Jan. 28 emergency meeting,
making the lira more expensive to short and prompting a 6.3
percent rally. Brazil raised its target rate a quarter-point to
11 percent last week. India has also unexpectedly increased
borrowing costs while Indonesia has been boosting its reference
rate at the fastest pace since 2005.

“In our eyes, we are only at the beginning of the carry
cycle,” David Bloom, the global head of currency strategy at
HSBC Holdings Plc in London, wrote in an April 2 note, referring
to the practice of buying emerging-market assets for their
relatively high interest rates.